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Costs

FixedCosts

Variable Costs

Types of Cost

Ch 5(B) : Capacity Planning: Break-Even

Analysis Operation costs are divided into 2 main groups:

• Fixed costs

• Variable costs

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Include rent, property tax, property insurance, wages of permanent employees, depreciation (except in working hour depreciation).

The total fixed cost is fixed throughout the year.

It does not depend on the production level.

When we have a plant, then the above costs are fixed, no matter if we produce one unit or one million units.

Fixed Costs

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Total Fixed Cost and Fixed Cost per Unit of Product

Total fixed cost (F)

Production volume (Q)

Fixed cost per unit of product

(F/Q)

Production volume (Q)

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Variable Costs

Costs of raw material, packaging material, direct labor, production W&P are the main variable costs.

Variable cost is fixed per unit of production. The total variable costs depend on the volume of production.

The higher the production level, the higher the total variable costs.

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Variable Cost per Unit and Total Variable Costs

Total Variable costs(VQ)

Variable costsPer unit of product(V)

Production volume (Q) Production volume (Q)

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Am

ou

nt

($)

0Q (volume in units)

Total variable cost (V

Q)

Total Fixed cost (F)

Total Costs

Total cost =

F+VQ

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Total Revenue

It is assumed that the price of the product is fixed, and we sell whatever we produce. Total sales revenue depends on the production level. The higher the production, the higher the total sales revenue.

Total revenue (TR)

Production (and sales ) (Q)

Price per unit (P)

Production (and sales) (Q) 8

Break-even point is the unit or dollar sales at which an

organization neither makes a profit nor a loss.

At the organization’s break-even sales volume:

Total Revenue = Total Cost

Break-Even Analysis

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Tota

l rev

enue

Total cost

Break-Even Point

Loss

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TC=TR

Break-Even Computations

TR=PQ

TC=F+VQ

QBEP = F/ (P-V)

F+VQ=PQ

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Breakeven (BEP)

Q BEP = FC . Times P P – VC

So: PQbe = FC x P P - VC PQbe = FC x P P/P – VC/P PQbe = FC atau FC 1 – VC/P 1 – VC/S

BEP (Rp/US$) = FC atau FC 1 – VC/P 1 – VC/S

Example

$500,000 total yearly fixed costs.$150 per unit variable costs$200 per unit sale price

QBEP=500,000/(200-150) =10,000 units

If our market research indicates that the present demand is > 10,000, then this manufacturing system is economically feasible.

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Example

Total a Unit

Sell (400unit) $ 1.000.000 $ 2.500

Variable Cost (VC) 600.000 1.500

Contribution Margin $ 400.000 $ 1.000

Fixed Cost (FC) 350.000

Net Profit $ 50.000

Q BEP = FC = 350.000 = 350

P – VC 2500 - 1500

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BEP (Rp/US$) = FC . 1 – VC/P

BEP = FC = 350.000 = 350.000 1 – VC/P 1 – 1500/2500 1 - 0,6 = 350.000 = Rp 875.000 0,4

BEP unit = 875.000 / 2500 = 350 unit

Atlanta Braves

$-$1,000$2,000$3,000$4,000$5,000$6,000$7,000

- 50 100 150 200 250

(in thousands)

(in

th

ou

sa

nd

s)

Revenues

Total Expense

Fixed expense Break even point

Profi

tLoss

Break even in units = 1,200,000Break even in $ = 1,200,000 x 24 = $28,800,000

BEA for Multiple Alternatives

Break-even analysis for multiple alternatives:Such an analysis is implemented to compare cases such as

In general, when we move from a simple technology to an advanced technology; F V

· A Simple technology· An Intermediate technology· An Advanced technology

· General purpose machines · Multi-purpose machines· Special purpose machines

· Low F high V · In between · High F Low V

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